Exam 12: Non-Current Financial Liabilities

Offsetting is the practice of showing the net amount of related assets and liabilities on the balance sheet,rather than showing each of the components separately.State and explain the pros and cons of offsetting assets against liabilities.

On May 1,2017,VeryFine LTD.provides a vendor with a $18,000 non-interest-bearing note due on May 1,2018 in exchange for furniture with a list price of $17,400.At what amount will the property be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 6% per annum for loans that mature in one year or less and 8% for loans with longer maturities.

Which statement is correct about the derecognition of an obligation before maturity?

What is the "best efforts" approach?

Complete the following chart to illustrate how leverage can increase investors' returns while concurrently exposing them to large losses. Facts: Calabria Corporation is a new company and has only one asset,its cash of $105,000 from the sale of common shares. In scenario 1,Calabria invests the $105,000 in a venture that will pay out either $85,000 or $135,000 at the end of one year,depending on the success of the venture. In scenario 2,Calabria borrows $210,000 at 7% interest and invests $315,000 in the same project outlined in Scenario 1.The payout will be $255,000 ($85,000 × 3)or $405,000 ($135,000 × 3)because it invests three times as much.

What is the effective interest rate?

Why do bonds often include covenants?

What is a "covenant"?

Which statement is correct about financial leverage?

Blue Corp is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below: Required: a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity;net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)). b.Which proposal will generate the higher estimated ROE? c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?

Missouri Wheels Ltd.(MW)sold $9,000,000 of fourteen-year,3% bonds at par on January 1,2017.Interest is payable on June 30 and December 31 each year.The bonds can be called at any time at 103 plus accrued interest.On April 1,2018,MW bought back $3,500,000 of bonds on the open market for $2,600,000 including accrued interest and retired them.On August 1,2019,MW called $4,500,000 of bonds and retired them.MW prepares accrual entries only at year-end. Required: Prepare journal entries to record: a.The open market purchase of the bonds on April 1,2018. b.The calling of the bonds on August 1,2019. c.Retirement of the remaining bonds on December 31,2030,assuming that the final interest payment has already been recorded in the company's books.

Which statement best explains a "leveraged buyout"?

Bold Accountants Co.sells $6,000,000 of 10-year,6% bonds priced to yield 5.5%.The bonds are dated and issued on January 1,2017.Interest is payable on January 1 and July 1 each year.Bold's year-end is June 30. Required: Prepare entries for a.The issuance of the bonds. b.Accrual of interest and related amortization on June 30,2017. c.Payment of interest on July 1,2017. d.Payment of interest and related amortization on January 1,2018.

Canadian Sea Rides Ltd.issues $8,000,000 of four-year,4% bonds dated January 1,2015.Interest is payable on January 1 and July 1 each year.The proceeds realized from the issue were the $8,529,082 sales price less the $50,000 fee charged by Sea's lawyers.Sea's year-end is December 31. Required: Prepare entries for a.The issuance of the bonds. b.Payment of interest and related amortization on July 1,2015. c.Accrual of interest and related amortization on December 31,2015.

Explain the difference between real-return bonds,convertible bonds and perpetual bonds.

There are three independent situations summarized below.In all three cases the bonds are sold on January 1,2016 and the issuing company has a December 31 year-end.In situation three,the bonds were all repurchased at par on January 1,2020. Required: Prepare journal entries to record: a.The issuance of the three bonds. b.Payment of interest and related amortization on December 31,2016.Prepare the amortization table to help you. c.Retirement of the situation 3 bond on January 1,2020.

Compare and contrast the two methods for amortizing the discount/premium. Interest expense in the first period is higher under which method for bonds sold at a discount? For bonds sold at a premium? Why does IFRS require public companies to use the effective interest method? Why do the Accounting Standards for Private Enterprises allow companies to use the straight-line method?

What is the market rate?